Southwest Gas Holdings, Inc.

ladies and gentlemen good day and welcome to the southwest gas holdings third quarter 2022 earnings conference call at this time all participants are in a listen-only mode a question and answer session will follow the prepared remarks if you would like to ask a question at that time please press star 1 on your telephone keypad as a reminder today's conference is being recorded i would now like to turn the call over to thomas moran Vice President, General Counsel, and Corporate Secretary for Southwest Gas Holdings. Please go ahead, sir.

Thank you, Jess. Hello, everyone, and welcome to the Southwest Gas Holdings third quarter 2022 earnings call. Throughout the call, we will be referencing presentation slides, which have been posted on our investor relations website. I am joined on today's call by Karen Holler, President and CEO of Southwest Gas Holdings, Justin Brown, President of Southwest Gas Corporation, Paul Daly, President and CEO of Century Group, and Greg Peterson, Senior Vice President and Chief Financial Officer. Please note that on today's call, the company will address certain factors that may impact this year's earnings and provide some longer-term guidance. Some of the information that will be discussed today contains forward-looking statements. These statements are based on management's assumptions, which may or may not come true, and you should refer to the language on slide 25 of this presentation and the press release, as well as our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements. All forward-looking statements are made as of today, and we assume no obligation to update any such statements. I'll now turn the call over to Karen.

Thanks, Tom. I'm pleased you're joining us today to discuss the Southwest GAS holding's third quarter results. Turning to slide four, I'd like to provide a brief strategic update. Earlier this week, we announced that Robert Stefani will be joining Southwest GAS as Senior Vice President and CFO effective November 30, 2022. Rob was most recently CFO and Treasurer at Pico Energy, an excellent company. And we are pleased to be bringing in such an accomplished leader to join our team. Rob is strategically oriented and brings strong skills in financial planning and analysis, operational finance, accounting, and treasury functions. As previously announced, Greg Peterson will be retiring from his position as CFO on November 30th. We want to thank Greg for his 27 years of dedication and contributions to Southwest Gas. We are continuing to review strategic alternatives for Mountain West and Sentry, including a sell or spinoff of Sentry. I appreciate that many of you are looking for an answer today regarding the timing of the strategic process. We are in the later stages of the process and remain actively engaged. We do not plan to provide additional details regarding the process, the timing, or speculate on potential outcomes while the process is ongoing. Our objective remains to maximize value for all stockholders, and we are expeditiously working toward that objective. Additionally, as previously announced, we have extended our cooperation agreement with Carl Icahn. Now that we've covered that, I'd like to turn to the business. Moving to slide six, all of us at Southwest Gas Holdings are energized by the opportunities we have in front of us. At the utility, we continue to strengthen financial and operational performance to accelerate value creation for our stockholders. We also continue to work to optimize our capital expenditure program. At Sentry, our utility infrastructure segment, we were confronted with significant inflationary pressures and customer supply chain challenges that affected margins during the quarter where we delivered record revenues. Finally, Mountain West remains an irreplaceable critical infrastructure asset that is structurally advantaged and could not be replicated today. Overall, the fundamentals of our business remain strong, even in the face of challenging macroeconomic conditions. Safety and reliability remain a priority as we meet the energy needs of our customers across our portfolio. We are confident our business is positioned for sustained profitable growth as we continue to meet the energy needs of our customers across our three independently strong businesses. Greg will discuss details on the performance of our three segments. But in summary, our third quarter results were broadly in line with expectations for our natural gas distribution and pipeline and storage segments, while our utility infrastructure segment was impacted by inflationary and other pressures. We believe we are well positioned to produce strong outcomes for our customers and the communities we serve and prioritize value creation for our stockholders. Now I'll turn the call over to Justin to discuss the utility.

Thank you, Karen. On slide seven, we provide an overview of several key initiatives we have underway at the utility. I want to start with an update on our pending Arizona general rate case. This is the largest rate case in the company's history, and it's something that is top of mind for all of us as we continue to work toward a final decision in early 2023. We completed hearings in September and legal briefing just a couple weeks ago. We were fortunate to reach stipulations with both ACC staff and the residential utility consumer office on several key issues just prior to hearing. We reached agreement to support an ROE of 9.3% and to use an equity layer of 50%. Following the board's announcement in August to suspend the strategic alternatives process for the utility, we developed an optimization plan consisting of seven different elements that will guide our focus at the utility over the next six to 12 months. We believe this plan provides an opportunity to level set where we have been by undertaking comprehensive analyses of existing capitalization and new business policies, as well as our budget process, and to take a deep dive into the current cost structure of the utility to make sure the investments we are making are efficient, targeted, and are positively contributing to building a solid foundation for future success. We believe this evaluation will help us identify cost savings and efficiency opportunities that will help support the tremendous growth we have across our service territory and help pass on savings to our customers, improve ROEs, and result in positive returns for our stockholders. We believe these efforts will also complement our commitment to delivering excellent customer service and operational efficiency. In fact, we were recently recognized by Forbes as one of the best in-state employers this year, and we rank number one by J.D. Power in customer satisfaction for businesses with natural gas service in the West, our third consecutive year. And we rank first in five of the six J.D. Power study factors, including safety and reliability, corporate citizenship, billing and payment, communications, and best in price. We have two very exciting sustainability and clean energy related projects we are working on. First, we have signed an agreement to serve as a utility energy services contractor for a project at Fort Irwin National Security Center in California. If approved by the commission, we will expand our service territory by constructing a 39 million, 22 and a half mile high pressure pipeline to serve the Army base and help them essentially transform the base into a sustainable microgrid community. We believe this is an excellent project to demonstrate the role natural gas plays in a sustainable energy future by providing energy reliability, resiliency, and security to the base, while also lowering GHG emissions and helping support both on-site combined heat and power and solar generation. We recently filed for approval of a hydrogen jet blending project In Northern California, this project proposes to utilize an electrolyzer to create hydrogen and test the blend of 5% to 20% hydrogen with natural gas. This project will provide invaluable information on the dynamics of hydrogen blending, especially in one of the coldest parts of our service territory. We are excited about this opportunity to demonstrate clean fuel technologies and the role they play in our future. We anticipate a commission decision sometime over the next 18 months. We are very excited about each of these initiatives and the opportunities that come with them. We also believe that following our comprehensive review and assessment as part of our optimization plan, that we will identify new opportunities and initiatives that will help pave the way as we chart our future to becoming an industry leader in operating efficiency, safety, cost management, and customer service. I'll now turn the call over to Paul to provide an update on Century.

Thank you, Justin. Century this quarter generated $750 million in revenues, which was a 20% increase compared to last year's quarter, driven principally by the inclusion of Riggs-Dissler, but it was also a 6% organic increase from our legacy gas and electric infrastructure businesses. These same legacy businesses year-to-date have achieved a 7% organic growth rate. We have a strong core customer base of many of North America's largest blue chip utilities and are well positioned for continued success as we further expand with Riggs-Dissler and our entire enterprise into new high-growth electric T&D, 5G, and offshore wind markets. That being said, I do want to take a few moments to talk about the headwinds we face this quarter and the pressure on margins from increased operating expenses in the current inflationary environment. There have been three principal impacts during Q3 and year to date that have affected us. One, inflation impacts primarily came from continued higher fuel and equipment rental costs along with subcontractor expenses. Fuel costs alone during the quarter were $9.5 million greater than last year. With 75 million miles driven year-to-date, providing infrastructure distribution transmission support, our fuel expense this year has increased by $28 million over the same period last year. There's two additional factors that have been or as impacted or more impacted to the bottom line than inflationary impacts. significantly less demand than normal for higher margin storm restoration services during the quarter and year to date. We expected a strong hurricane season in August and September, which is a normal start of the storm season, to begin to drive above storm revenue for the quarter and the year, but there were no hurricanes until the end of September. Hurricane Fiona made landfall in Nova Scotia and Hurricane Ian that made landfall in Florida generated $18 million of revenues in Q3. But that is not near the level expected. With the typical hurricane season coming to a close at the end of this month, and given that we have experienced a $28 million year-to-date revenue reduction in storm work, it is very unlikely that we will experience this year anything close to our historical average of $75 million a year. It should be noted that if we had had a normal storm year and then going forward a normal storm year, we had double the number of electric crews today that we had last year during the third quarter. So our storm should be much higher during a normal storm year. The third impact is continuing significant supply chain issues faced by our clients have, in many instances, led to severe shortages of critical components required to start or complete new builds and delays in receiving the materials required for maintenance, replacement, or hardening work. The lead times for procurement of the key systems, materials, and components required for electric T&D work have increased by two to four times for most categories, with nearly all approaching or exceeding one-year delivery times. Several examples, late times for non-distribution power transformers are now 100 to 120 weeks. That's two times the normal delivery. Circuit breakers are 90 weeks. That's three times. And conductors are 80 weeks. That's four times what our utility clients normally take to receive the conductors. Similar impacts are experienced among gas distribution clients. On risers and gas meters, on the average, it's now over 60 weeks lead time. How has this affected us? Numerous capital projects that we had in our budget for performance this year as backlog or as a high percentage in our weighted pipeline have been delayed significantly and pushed into next year. Extended lead times also materially alters our work mix. and therefore our ability to efficiently sequence work resulting in less productive execution, which then leads to underutilized equipment, our labor becomes much less productive, and we realize increased project-related travel expenses. Century's financial performance was also impacted this quarter by increased amortization expense, about $3 million, and increased interest expense, $10 million, primarily related to the acquisition of Rich Dissler as interest expenses more than doubled due to higher rates on the acquisition debt. Additionally, we recognized a $5.7 million loss on a gas infrastructure contract this quarter. Although we generally bid, perform bid work less than 17% a year of our revenue, this bid project is for one of our larger utility clients, that we have worked for continuously for the last 15 years. Awarded in 2020, it had profitable execution all the way through the end of 2021. But this year, the project encountered, later in the year, inflationary cost increases in fuel and subcontractors and some unanticipated project-specific job site conditions, impacting productivity along with permitting delays that were the responsibility of others. The project is anticipated to be substantially complete in Q4 this year, and we are working with our long-tenured client to recover the incremental costs. Now let me turn to some of the highlights that make us confident that Century's business prospects are very strong and that we will successfully navigate the near-term headwinds. During the quarter, we won contract awards totaling $175 million, including a new Midwestern US gas utility MSA customer. We also secured $20 million in annualized incremental revenue increases on existing customer contracts to offset certain inflationary cost increases. These increases are all incremental to our normal contract revenue adjustment clauses that we achieve each year. In other words, they're all increases to our base rate, and this will benefit 2023 and future years. On clean energy projects, we're excited to be awarded notice to proceed for a $217 million agreement with Orsted to provide onshore assembly, fabrication, and port logistics for additional offshore wind projects in the northeastern United States. Together with their existing $135 million contracts and a pending $175 million award from Morristead, we expect soon to have over $500 million of backlogs supporting multi-year performance. We are very excited about these offshore projects, which will drive our revenue growth and increase our margins in 2023 and beyond. Additionally, we're very proud of our Line Tech National Power Line and Riggs Dissler Storm Cruise employees, which was comprised of 800 plus employees deployed across the Southeast and into Canada that helped restore power to countless communities after both Hurricane Fiona and Hurricane Ian. I also want to highlight our second annual sustainability report published this quarter. It clearly sets forth our commitment to making energy infrastructure more efficient while taking care of the people and places around us, a principle we value deeply. Finally, before I turn the call back to Karen, we anticipate current headwinds to persist into 2023, and we anticipate margin pressure from the economic environment to continue somewhat. After the close on Ridge-Dissler, we started our integration work, and we have completed that integration. And across the enterprise, we have taken $20 million in annualized expenses out of the business going forward. In addition, with over $20-plus million in that incremental revenue assistance from our customers that I previously mentioned, we expect to drive growth and perform significantly better going forward than we have been able to during 2022. Notwithstanding these headwinds, the fundamentals of our business remain very strong. We have strong backlog and a high-quality project pipeline driven by an extremely strong multi-year outlook for our traditional gas and electric T&D markets and significant continuing multi-year additional growth opportunities in the 5G and offshore wind-related infrastructure. Karen?

Thanks, Paul. Now I'm going to turn to some of Mountain West's performance highlights this quarter. Mountain West delivered a $12.3 million of net income in the third quarter, while results were impacted by $5.7 million of pre-tax non-recurring expenses primarily associated with post-acquisition integration costs. Once these expenses are stripped out, these results were in line with company expectations. In addition, we see the potential for more than $200 million in incremental gross capital expenditure opportunities through 2025. Some of the details of each of those projects are included on the slide, including the Carbonate TAP expansion and Opal East expansion, which are already under contract. We expect to construct these projects at an EBITDA bills multiple of less than six times, driving meaningful value creation for stockholders. Throughout the integration, Mountain West has shown strong, consistent cash flow generation, high performance, and superior levels of customer service. Since acquiring the business, we have made enhancements to business systems and procedures to improve overall customer service. We are successfully recontracting all available capacity, and we have maintained subscription rates for all pipelines at significantly more than 90%. We are pleased to say that we expect the integration of Mountain West to be mostly complete by the end of 2022. And moving into the first quarter of 2023, we expect the majority of TSA services will conclude. And Mountain West will be a standalone organization, fully integrated into Southwest Gas. The last thing I want to cover is the FERC Rate Review, which is solely focused on one of the three Mountain West pipelines, the Mountain West Overthrust Pipeline. These kinds of rate reviews are relatively common, and we are well advised in the discussion. We have filed our initial response with FERC. Our position is that the FERC's estimate of a return on equity in excess of 30% is significantly overstated because the FERC's model did not apply the FERC's current requirements regarding the treatment of lease revenues. Current FERC precedent, reaffirmed as recently as a month ago, requires costs and revenues relating to a lease of capacity to be excluded from the calculation for rate-making purposes. Leaving all other assumptions from the FERC's model the same, properly excluding the costs and revenues received from Overtrust Lease of Capacity to Rocky Express Price Pipeline would result in a return on equity of 15.49%. which is below the level that has historically attracted FERC's interest. Any rate change could be prospective. We expect a final order in mid to late 2024, unless the rate review process results in a settlement. Now I'll turn the call over to Greg to discuss the financials.

Thanks, Karen. We issued our third quarter earnings press release and filed our 10Q earlier this morning. Please refer to these documents for additional background on our third quarter results. Let's start with a general overview of consolidated results. Slide 11 depicts consolidated operating results for the company and line items for each of the operating segments for the three, nine, and 12-month periods. On an adjusted basis, we recognize the loss of $0.05 per share for the third quarter of 2022 versus adjusted EPS of $0.05 a share for the prior year. Year-to-date 2022 adjusted EPS was $1.82 compared to $2.49 for the year-to-date 2021. And adjusted 12-month diluted EPS was $3.27 in 2022 and $4.28 in 2021. Before I talk about each operating segment, let me touch on a corporate and administrative line item on this slide. This line item for the 2021 period, those prior to our acquisition, of Mountain West includes G&A amounts not charged to the operating units and a small amount of interest expense related to the holding company credit facility. With the acquisition of Mountain West at year-end 2021, which was financed with Holdco debt, and the Fed fund rate increases, the interest component at Holdco was $13.8 million for the third quarter of 2022. The corporate and administrative line also included $6.8 million pre-tax of strategic review and related costs for the third quarter of 2022, which are components in that adjustments line. Next, let's move to the operating segments, starting with utility results on slide 12. As a reminder, due to the seasonality of our utility business, losses during the third quarter are expected. On a gap basis, utility results improved from a loss of $27.5 million in last year's third quarter to a loss of $22.2 million in the third quarter of this year. Operating margin grew by $11.4 million between the quarters, driven by $4 million of rate relief, primarily in Nevada, and recognition of previously unrecovered COIL and DSP amounts in Arizona totaling $5.2 million. The addition of 40,000 customers provided $2 million in operating margins. The $6 million increase in other income includes $3 million of higher interest income, primarily on deferred purchase gas adjustment receivable balances, and a $3.3 million reduction in non-service pension costs. Offsetting these items was a temporary $1.5 million decline in returns on clothing policy. Interest expense increased $4.5 million due to higher interest rates on variable rate debt and higher average debt balances. Let's now turn to slide 13 to discuss century requests. As shown on the right side of the slide, quarterly revenues for legacy century were up 6% between 2021 and 2022, as Paul mentioned. The revenues for Riggs-Dissler only reflect amounts since we acquired them at the end of August 2021. Legacy century revenues were up 7% for the year-to-date September 2022, compared to the same period in 2021. Customer supply chain constraints and lower storm restoration service work impacted expected top-line growth. The waterfall chart on the left side of the slide depicts the major components of the change in adjusted EBITDA between the nine months ended September 2021 and the corresponding period in September 2022. Higher fuel costs continued from earlier this year and increased $21.2 million between nine-month periods for legacy century operations. We have been successful with multiple utility companies in our contracts to adjust for fuel and other inflationary items going forward. A $5 million loss on a gas infrastructure job was recognized in the third quarter of 2022 due to unexpected cost overruns. As Paul mentioned, this project will be substantially complete by year end, and we are pursuing recovery from the customer for incremental costs. In connection with the lower storm restoration revenue that I mentioned earlier, the negative impact on EBITDA between periods was $6.4 million. While we cannot predict the level of storm work in any given period, we are proud of our responsiveness in reestablishing utility service for the families and businesses impacted by Hurricanes Fiona and Ian. The rigid insular adjusted EBITDA contribution of $32.5 million is net of $6.4 million of higher fuel costs. The growth prospects at Riggs-Dissler, including onshore projects for offshore wind, continue, but some work anticipated earlier this year has been temporarily delayed due to customer supply chain issues and changes in customer specifications. Turning to slide 14, we can see the third quarter results of Mountain West since we acquired them on December 31st of 2021. Both adjusted net income and adjusted EBITDA were in line with our internal expectations. Mountain West earned $12 million of net income in the third quarter and $17 million of adjusted net income after accounting for non-recurring expenses associated with stand-up integration costs, consultant fees, and one-time employee benefits. EBITDA was $35 million during the quarter and adjusted EBITDA was $41 million. including the previously mentioned costs. There is strong demand for natural gas transportation storage services in the Rocky Mountain region, and we have identified several growth projects for the business. Since the acquisition, strong operating cash flows from Mountain West have provided support for parent company interest on the acquisition debt and dividends to stockholders. Let me now move to slide 16. and our company guidance for 2022 and beyond. For Southwest Gas Corporation, we update our 2022 CapEx range to $650 to $675 million, previously with $600 to $650 million. We continue to focus on making capital investments to support customer growth, pipe replacement programs, and system improvements while optimizing the timing and amount of these investments. We reaffirm our utility net income estimate of $185 to $195 million. We continue to include the $3 to $5 million of normalized COLE income in our 2022 projection. We reaffirm our five-year capex spending plan of $2.5 to $3.5 billion through 2026, and the resulting rate-based increase CAGR of 5% to 7% during that same period. We reaffirm our five-year O&M per customer compound annual growth rate target of less than 1% 2022 to 2026, and reaffirm our 8% plus return on equity goal at the utility for 2023 forward. At Century, we modified and tightened our 2022 revenue guide to 2.6 to 2.7 billion from the previous 2.65 to 2.8 billion. due to a reduction in expected storm restoration work and continued customer supply chain issues that have temporarily delayed certain projects. Due to continuing inflationary pressures, especially on fuel, and some customer supply chain headwinds, we expect EBITDA margins of 8.5% in 2022, down from our previous guide of 10% to 11%. However, we believe these impacts are temporary and update our expectations that EBITDA margins will be 9.5% to 11% in 2023, previously 11% to 12%. For 2023 to 2026, we reaffirm a forecasted adjusted EBITDA compound annual growth rate of 9% to 11%. At Mountain West, we reaffirm our estimated revenue range of $250 to $255 million. We reaffirm our EBITDA margin range of 65% to 67%. We continue our integration plan of Mountain West, adjusting for one-time integration and overlapping costs. We reiterate that Mountain West will be accretive to EPS in 2022. As previously mentioned, we've identified over $200 million, previously $100 million, in incremental growth CapEx investment opportunities of Mountain West through 2025. I'll now turn the call back over to Karen for some closing remarks.

Thank you, Greg. Before we open the call for questions, I want to touch on a couple of the key points we've made today. I want to emphasize that maximizing value for all stockholders is what guides our strategic plan and the decisions we make. Southwest Gas Corporation and Mountain West continue to deliver results in line with our expectations, and we are actively managing the businesses to meet or exceed those results. While Sintra faces some short-term headwinds, fundamental drivers of the business are highly attractive. We are excited and confident in the future for Southwest Gas Holdings and look forward to continuing to serve our communities. Operator, you can now open the call for questions.

Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2. Again, that is star 1 for any questions. We will go first to Richard Sunderland with J.P. Morgan. Your line is open, sir. Please go ahead.

Hi, good morning, and thank you for the time today. Karen, I appreciate the many comments on the strategic review, but just a tenth one question on this format. I'm curious if you can frame the overall process backdrop and how that compares to your August update, just essentially is timing on track or if things slipped a little bit?

I would say that the process is taking maybe a little longer than we anticipated, but we are essentially on track. We will make announcements as soon as we have something. As I indicated, I think that we are, you know, approaching the later stages of the process, and we will hope to make some announcements once that, you know, process concludes.

Okay, understood. And switching gear to the results here, how are you dealing with the interest expense, particularly at the corporate level? You have this variable short-term debt, and you clearly had wind on the quarter. What's your strategy for handling that over the long term?

Yeah, Rich, this is Greg. We certainly, like most of the rest of the country, have been impacted by the Fed changes in interest rates, and we do have variable rate debt at both the holding company, the utility, and at Century. We are working through those processes. As you're aware, we recently extended the term facility at the parent company. That term one was originally due in December of this year, and we've extended to December of next year while we work through the strategic review process. So we think that's a key component of what we will do with debt going forward.

Got it. Appreciate your time today. Thank you. Thanks, Rich.

Our next question comes from Julian Dumond-Smith at Bank of America. Your line is open. Please go ahead.

Hey, good morning, good afternoon, team. I appreciate the time. Listen, I just wanted to come back to how you're thinking about the leverage question here. Really, do you think that we'll be looking at terming things out? I would think that the – answer on how to deal with leverage would come from the sailor spin consideration, but would you expect at that point in time to be turning things out, or are there other considerations as you think about just the short-term debt impact? Are there other, you know, rate hedging considerations here that we should be considering on a full year run rate basis? Just trying to get a sense on where that stands into 23 and the strategic avenues that exist out there to deal with some of the volatility and rates that we've seen for you guys.

Yes, certainly, Julian. This is Greg. Again, as I mentioned, we are experiencing that volatility. You know, the Fed has ramped up the Fed funds rate multiple times this year, and we are feeling the impact. However, due to the strategic process that we're in, we are monitoring that and looking for the optimal time to either term out or, you know, with proceeds from any sale to eliminate those debt obligations. But those are really all contingent on the process, and we will monitor that going forward.

Got it. And then related, how do you think about handling just the – I appreciate that you've got rate activities underway already, but prospective inflation at the core business, the core regulated businesses, specifically into 23 here, how do you think about that and that driving subsequent rate activity here anew, if you will? If you can kind of talk how it aligns with your rate case cycle.

Hey, Julian, it's Justin. Yeah, it's a great question. I think in our jurisdictions of Nevada and Arizona, there's some of the highest actually inflationary pressures across the nation from some of the data that I've seen. And so it obviously factors in. But I think historically, one thing to keep in mind, a lot of our rate case activity is actually driven by capital investments. given our cost management strategies and things. And so I'm sure it'll have an incremental effect, but really the drivers for us are going to be the capital timing and spend and filing of those future rate cases.

Excellent. All righty. And then can you talk a little bit about the other businesses here, both the Mountain West opportunities? It seems like growth is expanding a little bit. And then also just on the other businesses, how do you think about inflation and just ability for margins to, quote, normalize here a little bit, if you don't mind?

So with respect to the Mountain West opportunities, you know, we've added some additional opportunities. The $100 million was through 2024. We see some additional opportunities. Most of those are coal to gas conversions. We've had a number of customers, you know, customers that reached out to us with respect to some of those conversions. And so we do see additional opportunities coming with respect to growth with Mountain West.

And Julian, I'll step in this as Greg and just indicate that, yeah, all of our companies, again, we are not immune from inflation. And we are working with that. Paul mentioned in his remarks the things that we're doing in Century to try and mitigate and actually reverse some of those pressures by right-sizing our company as we have assimilated now Riggs-Dissler into the operations. We continue to look for cost-saving measures and cost-curving measures in all of our businesses at the utility, at Mountain West, and at Century. So we are working to do that to minimize the impact to our customers on a go-forward basis.

In addition to the $20-plus million that I mentioned in incremental rate adjustments, Those are great adjustments to existing contracts that are up for renewal. We have probably 20% to 25% of our large MSAs that were up for renewal starting in 2023. And we've already renewed those. And of course, we've baked into those the higher fuel rates and all the higher other inflationary rates on a multi-year basis. So that, in addition to the 20 plus million that we have from the customers. And then as Greg mentioned, we took, in the integration with Riggs, we took over $20 million out of the business. And it's non-recurring expense that's gone away.

Indeed. Excellent, guys. And hey, Greg, best of luck. It's been a real pleasure.

Thanks, Julian. Appreciate that.

Our next question comes from Ryan Levine with Citi. Your line is open. Please go ahead.

Thank you. Yeah, I wanted to focus on the 2023 guidance change for Century. Can you elaborate as to what percentage of the margin change was higher fuel, storm activity, and other changes on the cost structure relative to the new projects and incremental customers or growth opportunities you see?

Yeah, Ryan, this is Greg. I don't know that we... broken out the specific items there. Like I said, fuel is certainly a challenge for us, but as Paul mentioned, we are mitigating some of those challenges by right-sizing our operations and looking for other cost-saving measures. But it is still going to be a challenging environment in 2023, and so that was the reason for the reduction in the EBITDA margin down to the 9.5% to 11% range from our previous range. But we still see a marked improvement from 2022, as you can see. And we do have continued revenue growth. So we're looking at all fronts there. But we will continue to see some cost pressures and some levels of inefficiencies going forward. But as the supply chain for our customers on the century side continues to improve,

we will be able to be more efficient and have better mix of work, and we think that that will benefit us overall. To follow up on that, I mean, are you saying that effectively all that you've got margin changes is diesel cost outlook, and I guess the extent that that's a material portion, what lower curve are you assuming your price outlook for 23 in your guidance for diesel?

Yeah, I don't think we've put anything out as far as what we think diesel prices will be or fuel prices in general, but that is still an economic impact. I would love to see all fuel prices come down. The last time I filled up my tank here, it was just a tad below $5 a gallon fuel. for gas here in Las Vegas, so we will watch. But we do have the range of 9.5 to 11, and it includes what we think are reasonable assumptions for fuel prices in 2023.

Are you using the forward curve, or are you creating your own forecast?

I think if you look at the forward curve, That's kind of baked into what we have, but we are optimistic that things will get better. But much like everything that's being prognosticated for the future, including interest rates, there's quite a bit of variability there.

Okay. And then I appreciate the breakout of organic versus inorganic for century contribution for the quarter. Do you have a sense of the EBITDA contribution for the two quarters? for the inorganic legacy assets versus the incremental acquisition from an EBITDA contribution? Is it comparable to the revenue mix?

Yeah, I don't think we would get into that. I will say, and I think we've mentioned this on previous calls, Ryan, this is Greg again, that the work that Riggs-Dissler does is generally the electric work, and it has a little higher EBITDA margin. So that is an important piece of that, but we haven't broken out the specifics.

Okay. Appreciate the call. Thank you.

And that will conclude the Q&A portion of today's conference. I would now like to turn the conference back to Thomas Horan for closing remarks.

Thank you, Jess, and thank you all for joining us today. This concludes our conference call. We appreciate your interest in Southwest Gas Holdings. Have a good day.

Thank you. And again, ladies and gentlemen, that concludes today's Southwest Gas Holdings third quarter 2022 earnings call and webcast. You may disconnect your line at this time and have a wonderful day.